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GUEST SPOT: What Happens to My Credit if I Miss a Payment?

Canadians deal with all sorts of expenses, from groceries to rent to loan payments. While some are able to manage their payments, others are unable to make their bill or loan payments due to financial missteps or even simple forgetfulness. Unfortunately, such mistakes have significant consequences on your financial health.

What is Considered a Missed Payment?

In general, a payment made within 30 days of the billing statement is considered on time. In other words, a payment is considered missed or late when you do not make at least a minimum payment by the indicated due date on your bill or statement.

When are Missed Payments Reported to the Credit Bureaus?

In Canada, lenders and creditors use a code system to report both on-time and missed payments to the credit bureaus. This coding system is called a credit rating which uses numbers between 0 and 9 to represent whether you make your payments on time. For example, a credit rating of 1 indicates you’ve made your payment on time while a credit rating of 2 means you’ve missed a payment. Depending on how late your payment is, the information your lender provides to the credit bureaus will differ, which will affect your credit rating. Below are the credit ratings for late payments:

Credit Rating Days Late
2 31-59
3 60-89
4 90-119
5 120+
9 120+

Due to this reporting system, lenders and creditors generally report your missed payments in 30 days increments. Starting at 30 days, then 60, and 90. However, if you’re more than 120 days late your creditor can report it with a credit rating of 5 or as “bad debt” or “sold to a collection agency” with a credit rating of 9.
What Happens When You Miss a Payment?
When you miss a payment, there are certain steps creditors take to mitigate such behaviour.  From late fees to a bruised credit, here are some of the consequences of missing a payment:

Late Penalty Fees - Whether you’re 1 day, 5 days, or later, you’ll be charged a late penalty fee by your lender or creditor. These fees can easily range between $25 to $50, and can quickly add up if you continue to miss your payment due date.
Interest Rate Increase - Some lenders and creditors penalize late or missed payments by increasing your interest rate. This is particularly true for credit cards. When you miss a credit card payment, your APR can shoot up as high as 29.99%. As a result, the amount of interest you pay on your outstanding balance will increase. This, in turn, will also increase the amount of time it’ll take you to pay off your balance.
Introductory Interest Rate Cancellation - If you’ve been taking advantage of a limited-time low-interest balance transfer rate, you may have your offer cut short. Many financial institutions provide such benefits so long as you keep your account in good standing. As such, a missed or late payment could lead to your offers being revoked.
Negatively Affect Credit Score - Your payment history has the most influence on your credit score. Of the five factors that affect the calculation of your credit score, it accounts for 35% of your credit score. Ergo, any missed payments can significantly lower your credit score. Moreover, due to the credit rating system, the longer you don’t pay, the more it will affect your credit.

Tip: You can avoid penalties for missed credit card payments by at least making the minimum payment. However, it is not recommended as continuous minimum payments can easily lead to an unmanageable amount of debt. You should always try to pay off your debt as quickly as possible.

Why Do Missed Payments Affect Your Credit Score?
A credit score is calculated based on five main factors; payment history, credit utilization, credit mix, credit length, and credit inquiries. Each of these factors accounts for a certain percentage of your credit score, with payment history accounting for a little more than a third (35%). Considering the importance placed on your payment history, it’s apparent why it affects your credit score. Moreover, a credit score is defined as a number that represents your ability to repay debts. As such late and missed payments are seen as an inability to pay which in turn has a huge impact on your credit score.

What Can You Do To Avoid Missing Payments?

In order to avoid the consequences of missing a payment, here are a few steps you can take to make sure you never lag behind on your payments.

Automatic payments
If you often miss your credit card or loan payments, you can sign up for automatic payments. Automatic payments give your credit card issuer that authority to deduct your balance or minimum payment from your chequing or savings account when your balance statement is ready each month.

Set up Alerts
If you’re worried about overdraft fees and prefer to manage your payments manually, then you could try setting up alerts on your phone and calendar. You can also use online services and budgeting apps to help you set up payment alerts while managing your budget. This can ensure you aren’t spending above your means and that you always have enough for your payments.

Create an Emergency Fund
Often financial mishaps, emergency expenses, and unfortunate life events, for example, job loss can have you scrambling for cash. Unfortunately, when you’re strapped for cash, you may be forced to forgo certain bills in order to pay for more pressing matters. However, with an emergency fund, you can ensure that you’re able to cover any unexpected expenses as well as your current financial obligations.

Bottom Line
As mentioned, missed or late payments can have a significant impact on your credit score. Considering the financial importance of a credit score, it’s wise to take the time to ensure you do your best to keep it healthy. Whether you set-up automatic payments or alerts, any action you put toward it will repay you with a better credit score. This, in turn, will award you with affordable credit products and better financial opportunities.

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